British pound futures
Fundamental Analysis

British Pound (6B) Futures Trim Losses as Optimism Stems from UK’s Budget

  • Dollar weakness after the US inflation report boosts the British pound futures.
  • The UK economy shrank in September, signaling the start of a possibly long recession.
  • Markets are awaiting the new budget by Jeremy Hunt.

On Friday, the British Pound (6B) futures prices gained ground for a second day on expectations that the Federal Reserve would raise interest rates less aggressively due to lower US inflation. This expectation caused the dollar’s worst two-day decline in 13 years. Markets expect the Fed to raise rates by 50 basis points at the upcoming meeting in December.

Elsewhere, Britain’s economy contracted in the three months to September, signaling the beginning of what is expected to be a protracted recession. This highlights the difficulty facing Jeremy Hunt, the country’s finance minister, as he plans to increase taxes and reduce spending.

The moment investors have been anticipating is approaching. The UK government’s fiscal plan will be unveiled on November 17 by Jeremy Hunt. The pound fell to its knees after September’s mini-budget from former finance minister Kwasi Kwarteng. There is, therefore, a lot riding on Hunt’s next move.

Hunt has abandoned most of Truss’ plan and hinted that 60 billion pounds ($68.70 billion) in tax increases and spending reductions would be implemented to close a huge gap in public finances.

UK yield curve (Source: Refinitiv Datastream)
UK yield curve (Source: Refinitiv Datastream)

UK markets have recovered most of the losses from Truss’ mini-budget, with the bond market looking better, but the future remains bleak. The economy might experience its longest recession in a century due to the cost of living crisis. According to Hunt, raising taxes will be necessary for this week’s budget proposal to stabilize the public finances and shorten the possibility of a prolonged recession.

Hunt is attempting to restore Britain’s confidence among investors in the first budget proposal since Rishi Sunak succeeded Liz Truss as prime minister last month. He promised to correct her economic policy blunders, notably a series of unfunded tax cuts. This might, in turn, support the pound.

“This is going to be a big moment of choice for the country, and we will put people ahead of ideology,” Hunt told the Sunday Times in an interview.

“You’re going to have a Conservative chancellor who is putting up taxes that, you know, go against the very reason that he went into politics,” he said, adding: “you have to do what is right for the country. The situation that we’re in, unfortunately, means tax rises.”